Investing for Change: Institutional Investors Push to Incorporate Diversity, Equity and Inclusion in Private Markets Portfolios

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Protests against racial violence and injustice around the world have put a spotlight on inequality, accelerating the demand for far-reaching social, political and corporate transformation. As a result, organizations are becoming more focused on the need to address diversity, equity and inclusion (DEI). As institutional investors turn to private markets, they are seeking to address systemic imbalances by increasing diversity within their organizations and boosting DEI with their investment portfolios. This includes implementing DEI manager programs and expanding due diligence frameworks to include diversity metrics.

Evidence supporting the positive impact DEI has on private market performance is mounting. Mercer’s white paper, The Power of Change: The what, why and how of creating a diverse private market portfolio, addresses why incorporating DEI into private market portfolios could result in performance that outperforms benchmarks. For example, recent research suggests diverse teams make better decisions1 and are less likely to be influenced by unconscious biases. A 2019 study conducted by the National Association of Investment Companies (NAIC) found that, from 1994 to 2018, diverse funds outperformed the top quartile benchmark on a net IRR basis, and outperformed the benchmark median quartile on a Total Value to Paid In Capital and a Distributions to Paid In Capital basis2.

“The pandemic and growing demand for social change, coupled with market volatility, have made investors realize that change is here. There are many benefits to embracing DEI, as well as risk mitigation considerations. By creating a private markets DEI investment program, institutional investors can send a strong signal to asset managers that diversity is a priority. We are working with managers and asset owners to help them transform investment management through their portfolio investment choices,” said Raelan Lambert, Global Alternatives Leader, Mercer. “By increasing the diversity of their managers, investors can create an environment where new ideas can thrive. This environment enables fresh perspectives and different networks through which to access potential new deal flow.”

Defining DEI

To develop and implement an effective DEI investment program in private markets, it is essential to have a clear, consistent and quantifiable definition of what the term means in investment practice. Criteria that Mercer believes to have considerable influence on the success of a DEI program include fund manager ownership, investment team composition, investment committee composition, thresholds and alignment. In Mercer’s view, the investment committee composition is the most meaningful criteria when evaluating the levels of DEI at a private markets fund manager, as this is typically where final investment decisions happen.

“Not only are we encouraging our clients to focus on creating a diverse and inclusive culture and helping to ensure that shareholder value has the chance to grow through DEI, equitable benefits, social investment and pay equity, but also we are aiming to live this ourselves through our organization. We feel that success is measured by our financial and client engagement results, as well as how well we are attracting and retaining talent with diverse backgrounds and experiences,” said Amy Ridge, Principal, Mercer.

“Specifically, we have made progress improving gender parity over the last five years within Mercer, and we are doing more to develop and retain women in leadership roles. Our diversity agenda also includes targets that will hold us accountable for increasing the representation of our racially and ethnically diverse colleagues. Additionally, we are using our own history of ESG investment strategies to advise and bring creative solutions to clients seeking to invest in under-represented segments of the private market universe, focusing on women, Black, LatinX, LGBTQ+ and other managers that may have historically faced systemic bias,” concluded Ridge.

About Mercer

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s more than 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of over $17 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.

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1http://www.chabris.com/Woolley2010a.pdf; https://ssir.org/articles/entry/the_rise_of_gender_capitalism#; https://insight.kellogg.northwestern.edu/article/better_decisions_through_diversity

2 Examining the Returns, 2019, NAIC

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Contacts

Micaela McPadden
+1 201-694-9719
Micaela.Mcpadden@mercer.com